ESOPs vs. Traditional M&A Sale (Strategic or Financial Buyer)

ESOPs are an option for cannabis business owners looking for succession, liquidity, or growth. Selling to a strategic buyer (such as a multi-state operator) or a financial buyer provides an immediate full exit with a potentially high payout. However, it often results in the loss of company identity and control, potential layoffs, and cultural shifts. Additionally, there are capital gains tax implications, and 280E tax burdens remain unless structured otherwise. By contrast, an ESOP retains company independence, preserves legacy, and provides employees with ownership, but may not offer as large an upfront payout as an M&A sale.

ESOPs vs. Private Equity or Venture Capital Investment

Private equity or venture capital investment provides immediate liquidity and growth capital while allowing founders to retain some ownership. However, investors typically seek a return within 5-7 years, influencing strategic decisions. Employee ownership is usually limited, and 280E tax relief does not apply. In contrast, an ESOP provides long-term stability, tax advantages, and broad-based employee ownership. While private equity supports rapid expansion, it often comes at the cost of control and cultural shifts.

ESOPs vs. Management Buyouts (MBOs)

In an MBO, the existing management team purchases the company, ensuring continuity. However, ownership remains concentrated among a few managers rather than being broadly distributed among employees. Financing can be a challenge, especially in the cannabis sector, where traditional banks are reluctant to lend. An MBO can serve as a stepping stone to an ESOP, allowing for eventual transition to broad employee ownership. While an ESOP distributes wealth more evenly and provides tax advantages, an MBO is simpler and retains control within the existing leadership.

ESOPs vs. Employee Ownership Trusts (EOTs) and Other Trust Structures

Employee Ownership Trusts (EOTs) are gaining traction as an alternative model, holding the company in trust for the benefit of employees. Unlike an ESOP, EOTs do not create individual employee retirement accounts with shares. Instead, profits are shared through bonuses or reinvested into the company. EOTs ensure long-term stewardship and prevent company sale but lack the tax incentives and employee wealth-building opportunities of an ESOP. Additionally, EOTs do not provide relief from 280E tax burdens, making ESOPs a more financially advantageous option for cannabis companies.

Industry Adoption Trends and Data Insights

Rapid Growth from Zero

Before 2020, ESOPs were virtually nonexistent in the cannabis industry due to legal uncertainties. The first cannabis ESOPs emerged in 2023, and by 2024, high-profile conversions, such as Theory Wellness, brought attention to this model. Industry experts predict ESOP adoption will accelerate as more cannabis businesses seek tax relief and employee retention strategies.

Tax Advantages and Employee Retention

The biggest drivers of ESOP adoption in cannabis are tax relief and talent retention. A 100% ESOP-owned company can operate tax-free, significantly improving cash flow. Additionally, offering equity through an ESOP makes companies more attractive to skilled employees, reducing turnover and boosting morale. Employees of ESOP-owned companies generally accumulate greater retirement wealth, enhancing financial security in an industry known for volatility.

Employee Engagement and Cultural Impact

ESOP companies report higher employee engagement, as employees feel a sense of ownership and responsibility. This translates into better business performance, innovation, and customer service. In cannabis, where product quality and regulatory compliance are crucial, having invested employees can be a competitive advantage.

Challenges Slowing Adoption

Despite the benefits, ESOP adoption in cannabis faces hurdles. Setting up an ESOP is complex and costly, requiring significant legal, valuation, and administrative expenses. Access to financing remains a challenge, as traditional banks hesitate to lend to cannabis companies. Many cannabis ESOP transactions rely on seller financing or private lenders. Additionally, a lack of awareness about ESOPs as an option means many business owners do not consider them when planning their succession.

Choosing the Right Succession Strategy

The decision between an ESOP and alternative ownership structures depends on the company’s priorities. If maximizing immediate value is the goal, a traditional sale or private equity investment may be preferable. However, if preserving independence, maintaining culture, and providing long-term employee benefits are key priorities, an ESOP or trust structure may be a better fit. As ESOP adoption grows within the cannabis sector, more companies are recognizing its unique advantages in an industry facing financial and regulatory challenges.

Next Steps

For cannabis business owners considering an ESOP, the next steps include:

        Conducting a feasibility study to determine suitability.

         Engaging legal and financial advisors experienced in ESOP transactions.

         Exploring financing options, including seller financing and private lenders.

         Educating employees on the benefits and responsibilities of ownership.

         Establishing an ESOP trustee and governance structure for long-term success.